The document summarizes how the U.S. government budgets for student loan programs. It discusses the Direct Loan and Guaranteed Loan programs, the types of student loans (subsidized, unsubsidized, PLUS), and how the Congressional Budget Office estimates the costs of student loans on both a credit reform and fair value basis using accrual accounting. It provides data on CBO's projections of student loan volumes, subsidy rates, and budget outlays and authority for student loans and administration through 2027.

1. Congressional Budget Office
Postsecondary National Policy Institute
January 25, 2018
Justin Humphrey
Budget Analysis Division
How the Government Budgets for
Student Loans

2. 1
CBO
 The Federal Direct Student Loan Program
– As of 2010, all new federal student loans are in the direct loan
program.
– The federal government serves as the lender by providing the capital
for loans.
– Loans are still serviced by private-sector companies.
 The Federal Guaranteed Student Loan Program
– Before 2010, schools could choose between the direct and
guaranteed loan programs.
– Loans were made by banks and other financial institutions, and the
federal government insured those loans against loss and paid a
portion of the borrowers’ interest.
– Terms for borrowers were nearly identical in the two programs.
– No new guaranteed loans are being issued, but borrowers are still
repaying loans that originated before 2010.
Direct Versus Guaranteed Student Loans

3. 2
CBO
 Subsidized loans are need-based loans for undergraduate students. No
interest accrues while the borrower is enrolled in school or during other
deferment periods. Borrowing is limited by class level and dependency
status.
 Unsubsidized loans are non-need-based loans for undergraduate and
graduate students. Interest accrues at all times. Borrowing is limited by
class level and dependency status.
 PLUS loans are non-need-based loans for graduate students and
parents of dependent undergraduates. Borrowing is limited only by the
cost of attendance.
Types of Student Loans

4. 3
CBO
 The Federal Credit Reform Act of 1990 stipulated that the costs of all
federal direct and guaranteed loans must be recorded on an accrual, or
credit-reform, basis rather than on a cash basis.
 In cash accounting, costs are recorded when payments are made, and
revenues are recorded when receipts are collected by the federal
government.
 In accrual accounting, costs are recorded when goods are received or
services are performed rather than when they are paid for, and revenue
is recorded when it is earned rather than when actual payments are
received.
Cash Versus Accrual Accounting

5. 4
CBO
 The estimated net cost of a loan to the federal government is shown in
the year the loan is originated.
 To determine that cost, CBO estimates all future cash flows for a cohort
of loans originated in a specific year.
– Under a process called discounting, the value of future cash flows is
expressed in terms of today’s dollars.
– Credit-reform rules require the use of the interest rate on Treasury
securities with the same terms of maturity (the rate at which the
government borrows money) for discounting.
 Exception: Costs related to administering the student loan programs are
shown on a cash basis rather than an accrual basis.
How CBO Estimates the Costs of Federal Student
Loans on a Credit-Reform Basis

6. 5
CBO
Cost of this loan recorded in fiscal year 2018: -$224
Subsidy rate: -7.47%
(The subsidy rate is the sum of discounted cash flows, -$224, divided by the loan amount originated, $3,000, and expressed as a
percentage.)
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Total
Nominal Cash Flows
Disbursement 3,000 0 0 0 0 0 0 0 0 0 0 0 3,000
Repayment,
Principal 0 0 -243 -254 -266 -278 -291 -305 -319 -334 -350 -360 -3,000
Repayment,
Interest 0 0 -133 -122 -110 -97 -84 -70 -56 -41 -26 -9 -748
Total 3,000 0 -375 -375 -375 -375 -375 -375 -375 -375 -375 -369 -748
Discounted Cash Flows
Disbursement 3,000 0 0 0 0 0 0 0 0 0 0 0 3,000
Repayment,
Principal 0 0 -236 -242 -247 -251 -254 -258 -262 -265 -269 -267 -2,551
Repayment,
Interest 0 0 -129 -116 -102 -88 -73 -60 -46 -33 -20 -7 -673
Total 3,000 0 -366 -358 -348 -339 -328 -318 -308 -297 -288 -274 -224
Example: Estimate of the Federal Cost of a Loan
on a Credit-Reform Basis
(Dollars)

7. 6
CBO
 This procedure more fully accounts for the cost of nondiversifiable risk
that the government takes on.
 The same estimated cash flows are used, but the discount rate applied
to those cash flows is based on market prices rather than rates on
Treasury securities.
 The discount rate is higher and the value of future repayments to the
federal government is lower, which increases the estimated cost of the
direct loan program.
Estimating the Costs of Student Loans
on a Fair-Value Basis

8. 7
CBO
CBO’s June 2017
Supplemental Student Loan Data
www.cbo.gov/publication/51310

9. 8
CBO
Components may not add up to totals because of rounding.
1. Projections of discretionary spending for administering student aid are based on an inflation of the budget authority provided in the
most recent appropriations act rather than on an estimate of the future costs of administering the program. This total does not reflect any
potential reductions in spending stemming from the across-the-board cut that is part of the final appropriations act.
2. Projections of mandatory spending for administering student aid are based on estimated future costs of administering federal loan
programs
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2017-2027
Guaranteed Student Loans
Budget Authority 10,265 -468 -426 -412 -363 -322 -263 -214 -176 -145 -119 7,357
Outlays 10,022 -683 -617 -581 -512 -452 -376 -312 -262 -220 -184 5,823
Direct Student Loans
Budget Authority 24,749 -10,021 -7,908 -6,806 -6,233 -5,807 -5,907 -6,127 -6,350 -6,604 -6,846 -43,859
Outlays 23,810 -9,389 -7,718 -6,463 -5,806 -5,392 -5,334 -5,500 -5,701 -5,921 -6,144 -39,558
Student Aid Administration (Discretionary)1
Budget Authority 1,575 1,610 1,645 1,680 1,717 1,757 1,796 1,836 1,879 1,923 1,967 19,386
Outlays 1,535 1,584 1,623 1,658 1,694 1,732 1,771 1,811 1,852 1,895 1,939 19,095
Student Aid Administration (Mandatory)2
Budget Authority 1,857 1,922 1,987 2,052 2,120 2,193 2,273 2,348 2,410 2,459 2,505 24,127
Outlays 1,689 1,906 1,971 2,035 2,102 2,175 2,253 2,329 2,395 2,446 2,494 23,795
Total Student Loans
Budget Authority 38,446 -6,957 -4,703 -3,486 -2,759 -2,179 -2,101 -2,157 -2,236 -2,367 -2,493 7,010
Outlays 37,056 -6,582 -4,741 -3,351 -2,522 -1,937 -1,686 -1,672 -1,716 -1,799 -1,895 9,154
CBO’s June 2017 Projections:
Student Loan Totals
(Millions of dollars, by fiscal year)

10. 9
CBO
CBO’s June 2017 Projections:
Total Direct Loan Program
(By fiscal year, loan volume in millions of dollars)
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Total All New Loansa
Net Annual Loan Volume 100,910 104,463 107,810 111,417 115,552 120,024 124,321 128,904 133,775 138,953
Subsidy Rateb, c, d
-8.90% -6.82% -5.71% -5.07% -4.57% -4.48% -4.48% -4.48% -4.49% -4.48%
Subsidized Student Loans
Net Annual Loan Volume 22,964 23,789 24,548 25,268 26,122 27,060 28,093 29,060 30,089 31,186
Subsidy Rate
b, c, d
5.63% 7.78% 8.86% 9.52% 10.03% 10.13% 10.11% 10.10% 10.09% 10.08%
Unsubsidized Student Loans: Undergraduate
Net Annual Loan Volume 24,071 24,864 25,593 26,293 27,141 28,089 29,147 30,150 31,233 32,403
Subsidy Rate
b, c, d
-4.43% -2.85% -2.23% -1.75% -1.34% -1.29% -1.33% -1.35% -1.37% -1.39%
Unsubsidized Student Loans: Graduate
Net Annual Loan Volume 29,177 30,129 31,049 32,158 33,418 34,758 35,868 37,256 38,736 40,314
Subsidy Rate
b, c, d
-12.05% -9.45% -7.78% -6.93% -6.29% -6.16% -6.21% -6.22% -6.25% -6.26%
GradPLUS Student Loans
Net Annual Loan Volume 10,653 11,231 11,804 12,456 13,174 13,932 14,602 15,389 16,218 17,091
Subsidy Rateb, c, d
-13.82% -10.81% -9.23% -8.35% -7.69% -7.56% -7.60% -7.61% -7.63% -7.65%
Parent Loans
Net Annual Loan Volume 14,044 14,450 14,816 15,242 15,697 16,186 16,612 17,050 17,499 17,960
Subsidy Rate
b, c, d
-30.03% -29.08% -28.71% -28.39% -28.18% -28.18% -28.25% -28.27% -28.31% -28.33%
Components may not add up to totals because of rounding.
a. Totals exclude consolidation loans stemming from loans issued prior to 2017.
c. Subsidy rates do not include federal administrative costs associated with disbursing and servicing loans. Those administrative costs are included in the budget on a cash basis (see Table 3).
d. Subsidy rates were calculated using CBO's June 2017 interest rate forecast.
b. The subsidy rate is the net present value of the future federal cash flows divided by the loan dollars disbursed to borrowers each year. For example, the 2018 federal cost
associated with the $100,910 million in new loan volume would be -$8,981 million or -8.90% of the new loan volume [$100,910 * -.0890 = -$8,981]. In other words, the federal